WASHINGTON — Is U.S. inflation stuck at a stubbornly high level or is it steadily cooling? The government’s latest report on consumer prices, to be released Wednesday, should provide some hints. It will be closely watched by the inflation-fighters at the Federal Reserve as well as Republicans facing tough midterm elections, not to mention consumers still struggling with high grocery prices. Americans have grappled with worsening inflation since early last year, after tariffs lifted the cost of imported goods. Then this spring, the Iran war raised oil and gas costs, pushing inflation to its highest level in three years. The AI build out has also increased prices for computer chips and electronic equipment. All three trends could end up having only temporary effects and if they fade, inflation could drop back to the Federal Reserve’s 2 per cent target. Wednesday’s inflation report is expected to show that consumer prices rose 3.4 per cent in July from a year earlier, according to a survey of economists by data provider FactSet. That would be down from 3.5 per cent in June and lower than the recent peak of 4.2 per cent in May. On a monthly basis, prices are expected to have risen just 0.1 per cent from June to July, after they fell in June on sharply lower gas costs. Excluding the volatile food and energy categories, core inflation may cool for a second month, to 2.5 per cent, down from 2.6 per cent in June, according to FactSet. Core prices — which the Fed pays particularly close attention to — likely rose 0.2 per cent from June to July. A big reason inflation has cooled in the past couple of months is that gas prices fell after a ceasefire was reached in the U.S.-Iran war. Average gas prices were lower last month than in June, so that should reduce last month’s inflation reading. But gas prices rose again in late July and earlier this month, meaning inflation could pick up again when August’s figures are released next month, adding a layer of uncertainty. On Wednesday, gas averaged US$4.04 a gallon nationwide, 16 cents higher than a month ago, according to the motor club AAA. Overall, price increases have stayed above the Fed’s 2 per cent target for more than five years, suggesting that more than temporary factors may be at work. The cost of services such as healthcare, restaurant meals, and car maintenance are on average rising at more than 3 per cent annually, and they aren’t particularly sensitive to gas prices or AI investment. Rising costs for services often reflect higher wages, as companies charge more to offset the cost of higher pay. But incomes aren’t growing fast enough to sustain inflation, economists note. It’s a confounding situation that has left many economists — and Fed officials — seeking more information to determine where inflation is headed. “You’ve got all these things that are just not the way the economy used to behave,” Diane Swonk, chief economist at KPMG, said. For many consumers, years of sharply rising grocery prices have led them to adopt a wide range of coping strategies, from comparison shopping, to couponing, to cutting back on favorite foods. Some retailers, such as Walmart, have responded by rolling back food prices, a trend that could have lowered July’s inflation figures. Yet many other firms are still passing on higher costs. Paint company Sherwin-Williams is planning an 8 per cent price increase effective Sept. 1 to offset higher raw material costs, CEO Heidi Petz told analysts late last month. She said that because of the company’s strong relationships with suppliers, it was able to delay price increases until now. “We are seeing the impact of higher oil and related cost pressures, and we expect continued volatility throughout the balance of the year,” she said. Wednesday’s report comes as the Federal Reserve is sharply divided over whether it should hike its key interest rate to combat inflation. The Fed kept its rate unchanged, at about 3.6 per cent, at a meeting late last month. But the vote was 9-3, with three dissenters favoring a rate hike. And at a July 29 news conference explaining the decision, chair Kevin Warsh was vague about the Fed’s next steps, in keeping with his focus on reining in the central bank’s previous willingness to signal whether it was prepared to raise or cut borrowing costs. “If inflation continues to be elevated ... interest rates could well be part of that solution,” he said. “But I wouldn’t say it’s in isolation.” Long-term interest rates rose after Warsh’s comments, suggesting investors worried that inflation could worsen in the coming months and the Fed might not lift borrowing costs to fight rising prices. Complicating matters, the government said last week that employers had cut jobs in July, a sign of potential economic weakness. The Fed typically avoids rate hikes when hiring is faltering, because higher borrowing costs could slow the economy further. Investors now see the odds of a rate hike at the Fed’s next meeting in September as roughly 50-50, according to CME Fedwatch. ___ Christopher Rugaber, The Associated Press AP Writer Anne D’Innocenzio contributed to this report from New York.
